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Fed practicies and policies

1. Who issues (supplies) Treasury securities and why?

2. Who supplies reserves and why?

3. If the Fed increases its loans to banks at the discount window, what component of reserves rises?

4. If the Fed buys Treasury securities in the open market, what component of reserves rises?

5. Based on the answers above, explain the difference between non-borrowed reserves and borrowed reserves.

6. What are the net technical factors affecting reserves?

7. What is the federal funds market?

8. Why is the federal funds rate an indicator of monetary policy when it is the interest rate banks charge each other and is not set by the Treasury or the Federal Reserve?

9. True or false and explain: Other things equal, an increase in currency in circulation will cause the money supply to fall.

Solution Preview

Treasury securities are issued by the Department of the Treasury of the central government. It issues them to pay of government expenditures in excess of revenues.

Reserves consist of money in bank vaults (non-borrowed reserves) and funds held with a central bank (borrowed reserves). Reserves are required by the central bank in order to create a stable banking system. Reserves enable banks to meet obligations when their depositors withdraw funds.

Borrowing from the discount window increases borrowed reserves. Buying Treasuries increases bank ...

Solution Summary

Questions related to specific details on the functions of the Federal Reserve are discussed in the solution.